How can IT Contribute to Servitization in Manufacturing Firms?

Supervisor: Johan Brink and Evangelos Bourelos Master Degree Project No. 2016:169

Master Degree Project in Innovation and Industrial Management

How can IT Contribute to Servitization in Manufacturing Firms?

An investigation of the strategic role of the IT organization

Klaus Schrenker

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This work adds to the vast body of literature on servitization in manufacturing firms by investigating the contribution of dynamic capabilities and the strategic role of the IT organization to servitization. Specifically, the study develops three strategic roles the IT organization can play, based on an extensive literature review, and designs indicators which enable the measurement of these roles together with dynamic capabilities. The theoretical foundations were built by performing an extensive literature research on servitization, with focus on dynamic capabilities and Information Technology in particular. Primary data was obtained by executing a web-based survey to collect data on the degree and importance of servitization, the current role of IT and the possession of dynamic capabilities in participating companies. Using cross tabulation and frequency analyses to examine the small sample (N=19), tendencies in the relationships could be found. Most survey respondents expect an increasing importance of Product-Service Systems (PSS) and service orientation for their firms in the future. Manufacturing firms with a strong current service orientation seem to employ dynamic sensing capabilities. A connection between a high service orientation and dynamic seizing or reconfiguring capabilities could not be confirmed. Regarding the role of IT, tendencies towards a positive relationship between a strong Innovation Enabler role of IT and a high importance of the IT organization for PSS development, respectively PSS delivery were discovered. Furthermore, the role of IT as a Solution Integrator appears to be positively related to the importance of IT for PSS delivery. The study concludes with managerial implications for the strategic role of the IT organization against the background of servitization and gives suggestions for the alignment between business and IT.

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Diese Arbeit trägt zur umfangreichen, aber noch lange nicht vollständigen Sammlung wissenschaftlicher Arbeiten zum Thema Servitization in Industrieunternehmen bei. Im Detail wurden der Einfluss von dynamischen Fähigkeiten und der strategischen Rolle der IT Organisation auf Servitization untersucht. Basierend auf einer umfangreichen Literaturanalyse wurden drei strategische Rollen entwickelt, die eine IT Organisation einnehmen kann. Für diese Rollen, sowie für die im Rahmen von Servitization besonders wichtigen dynamischen Fähigkeiten, wurden Indikatoren konstruiert um eine Messung zu ermöglichen. Die Sammlung von Primärdaten zur momentanen und zukünftigen Bedeutung von Produkt-Service Systemen (PSS), der Service Orientierung, der Bedeutung der IT Organisation für PSS, als auch zu dynamischen Fähigkeiten und der aktuellen Rolle der IT erfolgte mittels einer Online-Umfrage. Eine deskriptive Auswertung des leider geringen Rücklaufs (N=19) ergab, dass der Großteil der befragten Industrieunternehmen für die Zukunft eine zunehmende Bedeutung von PSS und Service Orientierung erwartet. Umfrageteilnehmer, die eine hohe Service Orientierung angaben, bestätigten den Besitz von dynamischen Sensing-Fähigkeiten, während keine Verbindung zwischen einer hohen Service Orientierung und dynamischen Seizing-, bzw. Reconfiguring-Fähigkeiten nachgewiesen werden konnte.

Bezüglich der Rolle der IT scheinen Charakteristika die eine Innovation Enabler Rolle klassifizieren, eine positive Beziehung mit der Bedeutung der IT Organisation für die Entwicklung, als auch Lieferung von PSS zu haben. Die Rolle der IT als Solution Integrator hingegen scheint einen positiven Einfluss auf die Bedeutung der IT Organisation für die Lieferung von PSS zu haben. Letztendlich kommt die Studie zu dem Ergebnis, dass Industrieunternehmen die strategische Rolle der IT Organisation, im speziellen bezüglich der externen Orientierung und Wertschöpfung überdenken sollten, um den unterschiedlichen und oft widersprüchlichen Anforderungen von Servitization gerecht zu werden. Vor diesem Hintergrund wird empfohlen ein besonderes Augenmerk auf die strategische und funktionale Ausrichtung (Alignement) zwischen Business und IT zu legen.

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ABSTRACT _______________________________________________________________ I ZUSAMMENFASSUNG ____________________________________________________ II FIGURES AND TABLES ____________________________________________________ V

ABBREVIATIONS _________________________________________________________ VI 1.1 Problem under Study and Research Gap _____________________________ 1 1.2 Research Questions ______________________________________________ 2 1.3 Outline of the Thesis ______________________________________________ 3 1.4 The Industry Partner - Detecon _____________________________________ 3 2.1 Literature Review Approach ________________________________________ 5

2.2 Servitization _____________________________________________________ 6 2.2.1 Related Terms and Research Communities _______________________ 6 2.2.2 Drivers of Servitization ________________________________________ 8 2.2.3 Forms of Servitization_________________________________________ 9 2.2.4 Challenges in Moving into Services _____________________________ 10 2.2.5 The Service Paradox ________________________________________ 12 2.2.6 Measuring Servitization ______________________________________ 12 2.2.7 The Process of Servitization___________________________________ 13

2.3 Dynamic Capability Framework ____________________________________ 14 2.3.1 The Evolution of Dynamic Capabilities ___________________________ 15 2.3.2 Capability Building __________________________________________ 15 2.3.3 Operational Capabilities ______________________________________ 16 2.3.4 Dynamic Capabilities ________________________________________ 17 2.3.4.1 Sensing Capabilities _________________________________ 18 2.3.4.2 Seizing Capabilities __________________________________ 18 2.3.4.3 Reconfiguring Capabilities ____________________________ 19 2.4 The Role of IT for Servitization _____________________________________ 19 2.4.1 Vision of IT ________________________________________________ 20 2.4.2 Mission of IT _______________________________________________ 22 2.4.3 IT Governance and Degree of Centralization ______________________ 22 2.4.4 IT Controlling - Cost structure of IT _____________________________ 26 3.1 Research Type and Approach _____________________________________ 32

3.2 Hypotheses _____________________________________________________ 32 3.3 Research Methodology ___________________________________________ 33 3.3.1 Quality of the Research ______________________________________ 34 3.3.2 Survey Design _____________________________________________ 35 3.3.3 Data Collection _____________________________________________ 37 3.4 Data Analysis and Demographic Information _________________________ 38 4.1 Survey Results __________________________________________________ 41 4.1.1 General Observations on Servitization ___________________________ 41 4.1.2 Dynamic Capabilities ________________________________________ 42 4.1.3 The Role of IT _____________________________________________ 43 4.2 Conclusion and Managerial Implications ____________________________ 46 4.3 Limitations _____________________________________________________ 50 4.4 Suggestions for Further Research __________________________________ 51

REFERENCES __________________________________________________________ VII Servitization Survey __________________________________________________ xiv

Survey Data________________________________________________________ xxiii Demographic Information __________________________________________ xxiii Servitization Measures _____________________________________________ xxv Dynamic Capability Measures ______________________________________ xxvii Role of IT Measures ______________________________________________ xxix

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Figure 1: The study follows a deductive process _______________________________________ 3 Figure 2: Detecon offices worldwide _________________________________________________ 4 Figure 3: Forms of servitization ____________________________________________________ 10 Figure 4: Architecture of challenges ________________________________________________ 11 Figure 5: The service paradox _____________________________________________________ 12 Figure 6: Organizational capability building __________________________________________ 16 Figure 7: IT Portfolio _____________________________________________________________ 24 Figure 8: IT Governance - Degree of centralization ____________________________________ 26 Figure 9: Areas of IT controlling along the IT process model ____________________________ 28 Figure 10: IT’s value proposition ___________________________________________________ 29 Figure 11: Hypotheses ____________________________________________________________ 33 Figure 12: Survey structure ________________________________________________________ 36 Figure 13: Strategic Alignment Model _______________________________________________ 48 Figure 14: Modified Strategic Alignment Model _______________________________________ 49 Figure 15: Value contribution of IT roles _____________________________________________ 50

Table 1: Literature search keywords _________________________________________________ 5 Table 2: Five forms of servitization _________________________________________________ 10 Table 3: Survey questions for measuring servitization _________________________________ 13 Table 4: Literature for dynamic capability indicators ___________________________________ 17 Table 5: PSS development and delivery _____________________________________________ 20 Table 6: Vision of IT ______________________________________________________________ 22 Table 7: Mission of IT _____________________________________________________________ 22 Table 8: IT Governance ___________________________________________________________ 23 Table 9: Advantages and disadvantages of IT Governance models_______________________ 25 Table 10: Degree of centralization __________________________________________________ 26 Table 11: Center types ____________________________________________________________ 31 Table 12: Cost structure of IT ______________________________________________________ 31 Table 13: Hypotheses ____________________________________________________________ 33 Table 14: Data collection summary _________________________________________________ 38 Table 15: Hypotheses related to dynamic capabilities __________________________________ 43 Table 16: Hypotheses related to the Role of IT ________________________________________ 46

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DC Dynamic Capability

DCF Dynamic Capability Framework ERP Enterprise Resource Planning

ICT Information and Communication Technology IS Information Systems

IT Information Technology PSS Product Service System RBV Resource-Based View

RQ Research Question

SAM Strategic Alignment Model SDL Service Dominant Logic

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Chapter one briefly discusses the problem under study together with its wider background. The identified research gap is presented, followed by the research questions aiming to address it. Furthermore, the outline of the study, as well as the industry partner, are introduced.

1.1 Problem under Study and Research Gap

Industrial manufacturing firms are increasingly driven to abandon their traditional product-focused business model and move towards a more service-oriented business model (Teece 2010). Reasons that challenge manufacturers to reassess their business logic are among others stagnating markets, growing commoditization, new technological trends, and increasingly demanding customers. (Leseure et al. 2010).

According to Grönroos (2000) "Customers do not look for goods or services per se;

they look for solutions that serve their own value-generating processes" (Grönroos 2000, p.4). In other words, customers increasingly demand complex solutions instead of separate products and services. The transition from a product-oriented to a service- oriented business logic in manufacturing firms became known as servitization (Vandermerwe and Rada 1988).

In recent years, the majority of German and Swiss capital goods industries created only a small percentage of their total revenue through services (72 percent created less than 20 percent and 39 percent even less than 10 percent. (Gebauer and Fleisch 2007) Moreover, around 95 percent of the service revenues came from aftersales activities such as spare parts, maintenance and repair or training services, resulting in only 5 percent from innovative new services (Mahnel and Friedrich 2005; Gustafsson et al. 2010). Innovative services in combination with products are expected to play a crucial role for manufacturers in order to preserve competitiveness in the twenty-first century (Baines and Lightfoot 2013). Information and communication technology (ICT) is the foundation for most of these services and their integration with products (Song et al. 2015; Huang and Rust 2013; Peppard and Ward 2004; Brashear Alejandro et al.

2013; Penttinen and Palmer 2007).

Since the late 1980s, interest in the research field of servitization has grown rapidly (Baines et al. 2009). Major thematic research concerns are product-service differentiation, competitive strategy, customer value, customer relationships, and product-service configuration (Lightfoot et al. 2013). Moreover, previous research in the field has dealt with the transition process (Mathieu 2001b; Penttinen and Palmer 2007) and organizational arrangements (Brashear et al. 2012; Neu and Brown 2005).

Even though several authors acknowledge the essential importance of information and communication technology as an enabler for servitization (Neu and Brown 2005;

Penttinen and Palmer 2007; Huang and Rust 2013), the contribution of the IT organization, which is usually responsible for its management has rarely been investigated in this context. Consequently, the strategic management and strategic positioning of the IT organization for servitization represents a research gap which this study aims to examine.

1.2 Research Questions

In order to address the identified research gap, this study puts the strategic role of the IT organization in manufacturing firms in the focus of attention. The aim is to differentiate between different strategic roles of the IT organization, develop indicators that allow the measurement and examination of these roles in relation to servitization in manufacturing firms. For the purpose of doing so, the context of servitization and particularly the transition process constitute a necessary framework. The theoretical background of the study is therefore structured in three parts, as reflected by the research questions.

RQ1 Understanding Servitization: What are major drivers, forms, and challenges?

RQ2 What are dynamic capabilities and how can they support servitization?

RQ3 Which strategic role should the IT organization play to enable servitization?

First, servitization is discussed with emphasis on major drivers, forms and challenges.

Second, the dynamic capability framework is examined due to its importance for the transition process. The third part is concerned with the strategic role of IT and its contribution to servitization. Furthermore, the objective of this study is to connect

Information Systems (IS) and Information Technology (IT) research to servitization research, as well as to give ideas and suggestions for further research.

1.3 Outline of the Thesis

The study takes a deductive logic of reasoning (Figure 1) where theory guides research and therefore the collection of data intends to revise theory (Bryman and Bell 2011).

Figure 1: The study follows a deductive process (Bryman and Bell 2011)

In the following chapter two, a detailed theoretical background relevant to understand and connect the complex research fields of servitization and IT / IS research is provided. The theoretical background forms the basis for generating and analyzing the empirical results of this research. After the presentation of the research methodology and a short outline of considerations regarding reliability, replicability and validity, detailed information about the data collection methods and the data analysis is given in chapter 3. Consequently, the empirical findings of the study are presented in relation to the research questions and the theoretical background. Finally, a conclusion is drawn and managerial implications are discussed, before indicating research limitations and suggesting ideas and directions for future research.

1.4 The Industry Partner - Detecon

The industry partner of this research project is one of the world’s leading consulting companies for ICT management consulting. Provided services focus on consulting and

the implementation of solutions which are derived from the use of information and communications technology (ICT). Detecon’s portfolio comprises classic strategy and organization consulting as well as the planning and implementation of complex, technological ICT architectures and applications.

The company was founded in 1977, employs more than 1.200 associates around the world and has realized more than 20.000 projects for clients in over 165 countries.

Figure 2 gives an overview of Detecon offices worldwide. Detecon is a subsidiary of T- Systems International, the business customer brand of Deutsche Telekom.

Figure 2: Detecon offices worldwide (Company Presentation)

Due to their expertise in IT Strategy and a strong presence in the manufacturing industry, Detecon supported this research endeavor.

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In this chapter, a multidisciplinary theoretical background is presented that forms the basis of analysis for the following empirical study.

2.1 Literature Review Approach

In order to gain a comprehensive view on the analyzed concepts and for determining the conceptual grounding, a systematic literature review was carried out (Bryman and Bell 2011). Tranfield et al. (2003) define systematic review as “a replicable, scientific and transparent process, in other words a detailed technology, that aims to minimize bias through exhaustive literature searches of published and unpublished studies and by providing an audit trail of the reviewer’s decisions, procedures and conclusions”

(Tranfield et al. 2003, p.209). Servitization within the wider manufacturing context is a diverse and complex research field with several distinct research communities and concepts (Lightfoot et al. 2013; Baines et al. 2009). A categorization and introduction of the major research communities is given in 2.2.1 Related terms and research communities. As a basis for the literature review, a search strategy was developed by identifying relevant keywords, time frame, and data sources. The databases EBSCOhost, Emerald Insight, ScienceDirect, Scopus, Web of Science, Wiley Online Library, as well as the search engine Google Scholar were searched using the keywords and combinations of the keywords shown in table 1.

Servitization Servicizing Servicification

Product service offering(s) product-related service(s) Dynamic Capability (ies) Product service system(s) Integrated solution(s) Role of IT (Information

Technology) PSS Integrated product service Function of IT

(Information Technology) service-centered Integrated product and

service

Organization of IT

(Information Technology) service-oriented service integration Responsibility of IT

(Information Technology)

Table 1: Literature search keywords

Above listed keywords were frequently combined with “manufacturing” in order to ensure their relevance to this study. Publications before the year 2000 were excluded.

Exceptions were made for key literature in the designated fields, such as Vandermerwe and Rada (1988) definition of servitization.

A large number of articles was found in the selected databases, which can be rationalized by the complexity of the research endeavor, interrelatedness of the research fields and the resulting variety of keywords. The different research fields or research communities addressing servitization will be explained later on in more detail.

Discovered literature was filtered according to “times cited” and downloaded as far as a full-text version was available. First, duplications were detected and removed, second the abstracts were considered in order to choose appropriate literature. Initially the search identified around 250 articles, reports, and books. These could be carefully filtered to 104 articles and books that were considered for the research inquiry.

2.2 Servitization

The term Servitization was first defined by Vandermerwe and Rada (1988) and is widely recognized as the process of creating value through adding services to products (Baines et al. 2009). Since the late 1980s interest in the research field has grown rapidly, but the evolution of the concept can be traced back as far as the 1960s (Lightfoot et al. 2013). For the purpose of this study the view of Baines et al. (2009) on servitization as "...the innovation of an organisations capabilities and processes to better create mutual value through a shift from selling product to selling Product- Service Systems." (Baines et al. 2009, p.560) was adapted. Whereby the term “selling”

might be misleading due to numerous new forms of distribution and payment systems.

The following literature analysis aims to provide a holistic view on servitization and to answer RQ1: Understanding Servitization: What are major drivers, forms, and challenges?

2.2.1 Related Terms and Research Communities

Existing literature on servitization is complex and diversified. There are five principal research communities engaging with servitization, each with a different focus and constitution (Lightfoot et al. 2013). A brief introduction of each community is given in order to enable an understanding of different ports of departure. The communities are

Services Marketing, Service Management, Operations Management, Product-Service Systems, and Service Science.

In the field of Services Marketing, research focuses primarily on a customer relationship management perspective of the service provision. A service dominant logic (SDL) has developed, which proposed that value is defined by and co-created with customers, rather than embedded in the output of goods (Lightfoot et al. 2013).

Deriving from operations and strategy domains, Service Management has a strong focus on service culture and service organizations, specifically in contrast to product- focused organizations (Lightfoot et al. 2013).

The broad field of Operations Management has expanded its scope with focus on operations management and strategy in the delivery of product and service combinations. Since the term servitization was first defined by Vandermerwe and Rada (1988), a growing number of publications are addressing the “servitization of manufacturing”. Competitive, service-led strategy for manufacturing is a growing area of interest (Baines et al. 2009; Lightfoot et al. 2013).

The Product-Service Systems (PSS) research community originated in Scandinavia, is closely connected to social, economic, environmental, and industrial sustainability.

This can be explained by the focus on asset use rather than on asset ownership to achieve economic growth (Tukker 2004). Even though the research streams within the communities of operations management and PSS have largely evolved in isolation with only a few links made by researchers, there is a strong overlap in the concepts relating to servitization (Lightfoot et al. 2013; Baines et al. 2009; Baines et al. 2007; Tukker and Tischner 2006).

Service Science is the fifth community contributing to servitization. It is an interdisciplinary concept and has derived from the Information Systems (IS) sector and within IBM (Lightfoot et al. 2013). The concept emphasizes service as a system of interacting components which include people, business, and technology (Chesbrough and Spohrer 2006).

The difficulty of considering and combining literature from these diverse research communities is to critically reflect on their context and origin.

2.2.2 Drivers of Servitization

Providing services is not new for manufacturing firms. Traditionally, services were often seen by managers as a necessary evil for the sole purpose of marketing strategies.

The largest share of total value creation came from physical goods and services were considered as an add-on (Gebauer and Friedli 2005).

Since then, there has been a dramatic change in perspective. The servitization literature commonly suggests three major driving forces that cause manufacturing firms to servitize (Baines et al. 2009).

Main financial drivers are a desired higher profit margin and stability of income. Service revenue is expected to be higher and more resistant to economic downturns.

Especially in some sectors where manufacturers have a high-installed product bases (Gebauer and Friedli 2005; Oliva and Kallenberg 2003). According to Sawhney et al.

(2004), firms, such as Siemens, GE, and IBM have achieved constant revenues from services despite a significant decrease in product sales. Strategic drivers are largely concerned with gaining competitive advantage in increasingly commoditized markets.

Services are becoming a main differentiating factor and set barriers for competitors since integrated product and service offerings are more difficult to imitate. Higher labor dependency and lower visibility make competitive advantages achieved through services more sustainable (Mathieu 2001b; Gebauer and Fleisch 2007; Oliva and Kallenberg 2003; Lightfoot et al. 2013; Baines et al. 2009) Marketing drivers aim for selling more products based on the provision of services. The service component is well known to influence purchasing decisions. In particular in business-to-business markets, customers increasingly demand services to maintain own flexibility, focus on core competencies, and reduce technological complexity. Resulting advantages for suppliers are customer loyalty, repeat-sales, and maybe most importantly, contact opportunities with customers, which allow to offer other products or services and tailor solutions based on customers’ needs (Gebauer and Fleisch 2007; Oliva and Kallenberg 2003; Vandermerwe and Rada 1988; Mathieu 2001a, 2001b).

2.2.3 Forms of Servitization

Customer centricity is a key feature of servitization strategies. Oliva and Kallenberg (2003) consider customer focus as consisting of two elements. First, the shift from product-oriented offerings to the integration of user’s processes, and second the shift from transaction-based to relationship-based customer interactions. A variety of servitization forms with differing features have been identified by the literature along this “product-service continuum” (Oliva and Kallenberg 2003; Neu and Brown 2005;

Gebauer et al. 2007). The continuum ranges from product orientation where services are offered purely as add-ons to products, to results orientation where services create the main part of value with tangible goods as add-ons (Baines et al. 2009; Tukker 2004).

Neely (2008) holds a similar view and differentiates between five forms of servitization along the discussed continuum: Integration oriented PSS, product oriented PSS, service oriented PSS, use oriented PSS and result oriented PSS. The forms of servitization are described in table 2 and visualized in figure 3.

Integration oriented PSS

Ownership of the tangible product is transferred to the customer, but the supplier seeks vertical integration, for example by moving into retail and distribution, financial services, consulting services, property and real estate services, or transportation and trucking services.

Product oriented PSS

Ownership of the tangible product is transferred to the customer, but additional services directly related to the product are provided, e.g.

design and development services, installation and implementation services, maintenance and support services, consulting services, outsourcing and operating services, procurement services.

Service oriented PSS

Services are incorporated into the product itself. Ownership of the tangible product is still transferred to the customer, but additional value added services are offered as an integral part of the offering, e.g.

health usage monitoring systems and intelligence vehicle health management. This is the first option which involves a coupled product and service, as opposed to product plus service.

Use oriented PSS

Focus is shifting towards the service (which is delivered through a product). Often ownership of the tangible product is retained by the service provider, who sells the functions of the product via modified distribution and payment systems, such as sharing, pooling, and leasing.

Result oriented PSS

The Service seeks to replace the product, thereby doing away with the need for the product, or certainly an individually owned product. A classic example would be voicemail services where the service itself replaces the need for individuals to own their own answering machines.

Table 2: Five forms of servitization, according to (Neely 2008)

Figure 3: Forms of servitization, according to (Tukker 2004; Neely 2008)

The importance of IT for servitization is particularly explicit when products and services are incorporated as described for service oriented PSS. More and more business models arise within the manufacturing sector where the value proposition is mainly based on services as the fundamental value creating activity, reducing products to become the minor part of the offering (Oliva and Kallenberg 2003; Vandermerwe and Rada 1988).

2.2.4 Challenges in Moving into Services

Manufacturing firms face several challenges when pursuing a servitization strategy (Baines et al. 2009). Products and services have a significantly different design process. Service design is often difficult to define, fuzzy, and a special focus needs to be put on describing and communicating the value proposition to customers. In this context Gustafsson and Brax (2005) emphasize the importance of integrative information technologies and information management practices for the development and delivery of complex services. Moreover there is a risk of unexpected rivalry with suppliers, distributors, and customers, when competition from outside the former value

chain position is not taken into consideration (Vandermerwe and Rada 1988; Oliva and Kallenberg 2003; Mathieu 2001b). It is not sufficient to merely define a service-oriented strategy. Organizational structures, processes, and capabilities have to be shaped accordingly to carry out the strategy. This means implementing service orientation and customer-centricity for the development, as well as the delivery of services. In this context, partnering with suppliers and customers becomes increasingly important (Windahl et al. 2004; Oliva and Kallenberg 2003; Leseure et al. 2010). Mathieu (2001b) highlights that service management often conflicts with traditional manufacturing practices, for instance due to the difference in organizational culture. Hence, a shift in the corporate mindset is necessary to acknowledge and prioritize the importance of services. The approval of needed resources and management support will require significant changes to established attitudes and practices (Mathieu 2001b; Oliva and Kallenberg 2003). In figure 4, the servitization challenges are summarized according to (Leseure et al. 2010).

Figure 4: Architecture of challenges, according to (Leseure et al. 2010)

This study discusses and addresses the challenges from the perspective of organizational capabilities and the strategic role of the IT organization. Nevertheless, as the building like structure suggests, the strategic objective of moving into services should be treated as a holistic approach, affecting the whole organization and necessitating changes throughout the business model (Kindström, Kowalkowski 2014;

Teece 2007).

2.2.5 The Service Paradox

The service paradox as discovered by Gebauer et al. (2005), describes the difficulty of manufacturers to exploit the financial potential of an extended service business.

Manufacturing firms trapped in the service paradox substantially invest in the service business, which leads to higher costs and increased offerings, but does not yield the expected higher return on services (Gebauer et al. 2005). The service paradox is visualized in figure 5, where transition line 1 represents manufacturing companies successfully transforming into service providers and exploiting the financial potential of an extended service business, while transition line 2 represents those companies failing to exploit the financial potential (Gebauer et al. 2005). Neely (2008) examined the effect of firm size and the extent of servitization on net profit as a % of sales revenue and discovered, that merely larger firms have difficulties to achieve financial benefits through servitization. He indicates, the “service paradox” would mainly result from companies disregarding the above mentioned challenges, struggling with their successful implementation or from cognitive phenomena limiting managerial motivation to extend the service business (Neely 2008).

Figure 5: The service paradox (Gebauer et al. 2005)

2.2.6 Measuring Servitization

For measuring the current and expected future degree and importance of servitization in the surveyed manufacturing firms, five questions are compiled. They aim to assess

the current, as well as future importance of PSS for the firm, as well as the current and future service orientation in policies, practices and procedures. Moreover, respondents were asked to estimate the share of their firm’s total revenues currently generated through services. The survey questions and related references are listed in table 3.

Survey Question Reference

How important are integrated product-service offerings currently for your enterprise?

(Brashear Alejandro et al.

2013); (Lytle et al. 1998) How important will integrated product-service offerings

become for your enterprise in the future?

(Brashear Alejandro et al.

2013); (Lytle et al. 1998) How important is service orientation in your

enterprise’s current policies, practices and procedures?

(Brashear Alejandro et al.

2013); (Lytle et al. 1998) How important will service orientation become for your

enterprise in the future?

(Brashear Alejandro et al.

2013); (Lytle et al. 1998) Which share of your enterprise’s total revenue is

currently created through services?

(Gebauer and Friedli 2005); (Gebauer et al.

2005)

Table 3: Survey questions for measuring servitization

2.2.7 The Process of Servitization

Baines et al. (2007) suggest that “the innovation of a manufacturing organization’s capabilities and processes to shift from selling product to selling an integrated product and service offering that delivers value in use” can be considered as the process of servitization.

As touched upon in 2.2.4 Challenges when Moving into Services, manufacturers need new capabilities that facilitate change in order to achieve a successful transition from products towards PSS. These capabilities can either be developed internally or externally. In fact, the decision is similar to the “make or buy” question (Davies 2004).

Surprisingly, a major share of the literature dealing with the transition does not touch upon the sourcing decision for developing and delivering PSS (Paiola et al. 2013;

Gebauer et al. 2005). Mathieu (2001b) refers to the capability sourcing as a continuum between internal development, partnering and outsourcing. The internal development of capabilities has the advantage for firms to keep control of all services and products which are part of the solution. This is seen as beneficial for the integration of all components due to less coordination efforts across organizational boundaries (Nordin 2008). On the contrary, it might become more difficult for companies to specialize in

particular capabilities due to the increased number of capabilities. Moreover costs might be higher compared to external sourcing from the market. Advantages of external capability development are timeliness and lower fixed costs (Neely 2008).

Nevertheless the risk of losing control over the service component, the risk of competitive behavior by business partners, and the high integration costs should not be neglected (Paiola et al. 2013).

A major challenge with the shift from products to PSS is the management of capabilities that are seen as essential for organizational change in general, and service innovation in particular (Kindström et al. 2013; Teece 2007). In order to understand these specific capabilities, the dynamic capability framework is introduced in the following.

2.3 Dynamic Capability Framework

Dynamic capabilities are widely seen as a key to competitive advantage and superior enterprise performance in rapidly changing and strongly competitive environments (Teece 2007; Teece et al. 1997; Winter 2003). Recently published literature increasingly focuses on dynamic capabilities as enabler for servitization (Kindström et al. 2013; Gustafsson et al. 2010; den Hertog et al. 2010) and as key to business architecture leading to alignment between business and IT (Ross et al. 2014).

Dynamic Capabilities are a “firm’s ability to integrate, build, and reconfigure internal and external competences to address rapidly changing environments” (Teece et al.

1997, p. 516).

According to Teece (2007), dynamic capabilities are especially relevant to multinational enterprises operating in business environments with the following characteristics:

 An environment open to international trade and exposed to rapid technological change.

 Technical change taking place as a complex process, presuming the combination of multiple inventions to create products and services.

 The existence of well-developed markets for the exchange of services and goods.

 Poorly developed markets for the exchange of technological and managerial know-how.

These characteristics can be found in most sectors of the global economy and in particular in the capital goods and high-technology sector. In these sectors, Teece (2007) argues, it is not sufficient to focus on process optimization and scale economics for sustainable success, but rather on the continuous discovery and realization of internal and external opportunities.

2.3.1 The Evolution of Dynamic Capabilities

The dynamic capability framework (DCF) “is grounded in Kirznerian, Schumpeterian, and evolutionary theories of economic change…” (Teece 2007, p. 1325) and builds strongly on the resource-based view (RBV) of the firm (Grant 2010).

With the rise of the RBV and the DCF in the 1990s, the focus of analysis in strategic management literature shifted from the firm’s position in its external environment, as provided by porter’s five forces, towards the role played by the internal organization of the firm (Teece 2007; den Hertog et al. 2010; Grant 2010). In the RBV, a resource is defined as "...an asset or input to production (tangible or intangible) that an organization owns, controls, or has access to on a semi-permanent basis" (Helfat, Peteraf 2003, p. 999). The DCF in contrast, views organizational capabilities as a complex combination of various resources that express “what a firm can do” (Grant 2010). The major difference between the DCF and the RBV is that the DCF considers the evolutionary nature of resources and capabilities, while the RBV represents a rather static perspective (Gustafsson et al. 2010; Teece et al. 1997). According to Helfat et al. (2009), dynamic capabilities incorporate the capacity to identify the need or opportunity for change, formulate a response, and implement a course of action.

2.3.2 Capability Building

Capabilities are a coordinated set of tasks that require the integration of actions performed by various individuals and organizational resources. In order to transform into organizational capabilities, capabilities need to be routinized through firm specific managerial and organizational processes (Grant 2010; den Hertog et al. 2010).

Routinization is seen as an essential step since regular and predictable patterns of

activity lead to efficiency and reliability. Moreover, evolutionary economists view the adaptation and replication of organizational routines as fundamental building blocks for a firm’s development and for managing the trade-off between efficiency and flexibility (Grant 2010).

Figure 6 shows the described building of organizational capabilities based on two levels. On the resource level, internal as well as external resources that are key ingredients to the capability building are identified. Thereafter, the organizational level mobilizes and deploys these resources via organizational structures, processes and roles (Peppard and Ward 2004; den Hertog et al. 2010).

Figure 6: Organizational capability building, based on (Peppard and Ward 2004)

According to Sambamurthy et al. (2003), IT and business resources are integrated into organizational capabilities through what they call the “capability-building process”.

Furthermore they emphasize that the development of capabilities is based on strategic decisions about investments in IT that are aligned with business strategy and processes and takes place over time (Sambamurthy et al. 2003).

2.3.3 Operational Capabilities

In order to distinguish operational from dynamic capabilities, operational capabilities can be defined as "a coordinated set of tasks performed by various individuals and utilizing organizational resources to achieve a particular end result" (Helfat, Peteraf

2003, p. 999). In other words, operational capabilities ensure a stable base of ongoing operations for an organization in order to “earn a living at present” (Winter 2003; Teece 2007). While dynamic capabilities, by contrast, do not directly contribute to the output of a firm, but give direction to operational capabilities (den Hertog et al. 2010; Helfat, Peteraf 2003).

2.3.4 Dynamic Capabilities

In order to inquire dynamic capabilities, a process was developed for designing single statements (indicators) that represent a specific category of dynamic capabilities. The aim was to understand and differentiate between dynamic capabilities and enable their measurement in the surveyed firms. Thereby RQ2: What are dynamic capabilities and how can they support servitization?” can be addressed.

Initially, literature focusing on dynamic capabilities was screened for existing dynamic capabilities. In doing so, attention was paid to separate dynamic capabilities from other capability concepts which were not considered. As a next step, the discovered dynamic capabilities were gathered using a comprehensive spreadsheet. In a third step, redundancies were eliminated and the content was classified following Teece (2007) division into Sensing, Seizing, and Reconfiguring capabilities.

Table 4 lists literature considered in the process of compiling the statements.

(Kindström et al. 2013) (den Hertog et al. 2010) (Kindström, Kowalkowski 2014) (Weill, Vitale 2002)

(Teece 2007) (Gustafsson et al. 2010)

(Sambamurthy et al. 2003) (Akershoek 2016)

(Schuh et al. 2015) (Westermann et al. 2006)

(Street 2007) (Windahl et al. 2004)

(Fink, Neumann 2007) (Nylén, Holmström 2015) (Helfat et al. 2009) (Ross et al. 2014)

(Parida et al. 2015) (Story et al. 2016)

(Winter 2003) (Peppard and Ward 2004)

Table 4: Literature for dynamic capability indicators

The three categories of dynamic capabilities, together with the compiled indicators are introduced in the following.

2.3.4.1 Sensing Capabilities

Sensing capabilities detect and shape new technological and market opportunities but also potential threats. Activities involved are especially scanning, filtering, learning, and interpreting (Teece 2007; den Hertog et al. 2010; Kindström et al. 2013).

Therefore this study compiled that firms need the following characteristics (indicators) in order to successfully employ dynamic sensing capabilities:

 Continuously capture customer needs and identify target market segments.

 Exploit supplier and complementary innovation.

 Identify threats and opportunities in the extended value chain and such related to competitors’ behavior.

 Explore new technologies and developments in exogenous science.

 Direct internal R&D and select technologies based on above listed sensing activities.

2.3.4.2 Seizing Capabilities

Seizing capabilities address technological and market opportunities through new services (Teece 2007). Solely investing into technology is therefore not enough, an environment has to exist that is capable of sheltering and exploiting new opportunities as they emerge (Chesbrough 2010; Teece 2010). Organizational designs, structures, procedures, and incentives need to be shaped to overcome biased judgements that favor path-dependent decisions and bury opportunities (Teece 2007).

For the successful employment of dynamic seizing capabilities, firms need the following characteristics (indicators):

 Describe the customer solution and the corresponding business model in detail.

 Identify connections between existing capabilities and requirements of emerging opportunities.

 Experiment with new service opportunities through close interaction with customers.

 Implement decision making protocols to avoid decision errors and tendencies for anti-cannibalization.

 Select enterprise boundaries to manage complements and to control platforms.

 Integrate whole business processes of the customer.

2.3.4.3 Reconfiguring Capabilities

The third category, reconfiguring capabilities, match and manage the dependence between service strategy and organizational design in order to achieve strategic alignment (Teece 2007). According to Gustafsson et al. (2010), despite numerous literature on organizational factors for servitization, literature rarely gives guidance on how to achieve strategic alignment. Strategic alignment is seen as a complex process demanding ongoing assessment and realignment (Kindström 2010; Helfat et al. 2009).

To successfully employ dynamic reconfiguring capabilities, firms need the following characteristics (indicators):

 Adopt loosely coupled structures and develop integration and coordination skills.

 Achieve incentive alignment and avoid agency issues.

 Manage co-specialization so that asset combinations are value enhancing.

 Build loyalty and commitment to services.

 Establish knowledge management to transfer and integrate know-how.

 Scale up successful service innovations based on standardization and consolidation.

 Create a consistent service experience for customers, independent from the location and involved partners.

2.4 The Role of IT for Servitization

As introduced in the previous chapters Information technology (IT) is a key enabler for servitization in manufacturing firms (Brashear Alejandro et al. 2013) and essential for the building of organizational capabilities (Sambamurthy et al. 2003). One could reason that "the service revolution and the information revolution are two sides of the same coin" (Rust 2004, p. 24). Or as Huang and Rust (2013) put is: "Service is not new; it is service plus IT that transforms service." (Huang and Rust 2013, p. 251). IT enables deeper customer relationships and insights, as well as the provision of complex service offerings, such as service-oriented, use-oriented, and results-oriented PSS (Penttinen and Palmer 2007). Examples of IT-enabled services are new service-oriented PSS

which depend on the collection, processing, and evaluation of real-time information about the condition and utilization of the installed base (Kowalkowski, Brehmer 2008).

In order to measure the importance of the IT organization for the development and for the delivery of PSS, the following questions were included in the survey (table 5).

Table 5: PSS development and delivery

The strategic role of IT, embodied by the IT organization, has a decisive influence on the relevance and impact IT plays in a firm. Prior studies have hardly focused on the role of the IT organization as an enabler for servitization. Noteworthy exceptions are Brashear Alejandro et al. (2013) investigation in how ICT can enable service differentiation and in doing so act as a catalyst for service business orientation, and Song et al. (2015) special section on the role of information technology.

For the purpose of addressing RQ3: Which strategic role should the IT organization play to enable servitization? , this study classifies IT along the three roles Innovation Enabler, Solution Integrator and Efficient Operator. The three in the following sections developed roles of IT are characterized by five components: A vision and mission, the governance responsibility regarding technology and service innovation projects and delivery, the degree of centralization regarding IT portfolio decision, as well as the cost structure. The roles should be seen as a continuum rather than as sovereign entities.

2.4.1 Vision of IT

Zimmermann (2013) recommends that the vision and mission of IT should be compiled based on organizational requirements, which derive from a detailed analysis of business objectives, technological and market trends, the external environment, as well as single department needs.

Survey Question Source

How important is the IT department currently for developing integrated product-service offerings?

(Huang and Rust 2013);

(Gerick 2014); (Sambamurthy et al. 2003); (Belvedere et al.

2013) How important is the IT department currently for

delivering integrated product-service offerings?

(Huang and Rust 2013);

(Gerick 2014); (Sambamurthy et al. 2003); (Belvedere et al.

2013)

An organizations vision or vision statement generally expresses what an organization wants to become (Grant 2010). For the purpose of practical implication and to simplify comprehension, the vision indicators were formulated as actions. Ramiller and Swanson (2003) observe that from a practitioners perspective "…organizing visions are important in shaping thinking about the opportunities (and threats) that may lie ahead, in establishing expectations concerning what constitutes effective, proper, and up-to-date practice, and in motivating the action that will help to create the future of IT application and practice." (Ramiller and Swanson 2003, p. 15)

The mission on the other hand defines the purpose of an organization and identifies the scope to set it apart from other organizations (Pearce II, David 1987).

The characteristics of the three in the following described roles of IT are based on Peterson (2004a); Peterson (2004b); Guillemette and Paré (2012); Sambamurthy et al. (2003); Sia et al. (2010); Gottschalk (2004); Gerick (2014); Ross et al. (2010); and Ross et al. (2011).

When the IT organization embodies the role as an Innovation Enabler, IT is impact oriented, seeks to deliver value through innovative solutions and drives first mover advantage. IT as a Solution Integrator is integration oriented and defines new capabilities together with business to meet time-to-market requirements. Delivery of leading edge solutions that support new offerings takes place either through internal development, external contracting or packaged software. The third role of IT as Efficient Operator is infrastructure oriented and focused on providing IT operations and solutions with a maximum of reliability and availability. IT meets standard business requirements and manages cross-unit synergies across the organization.

The following table 6 summarizes each IT role’s vision as stated in the questionnaire.

Innovation Enabler IT drives first mover advantage through innovative solutions.

IT tailors offerings that outperform business demands.

Solution Integrator

IT continuously enhances business operations with leading- edge solutions.

IT defines future requirements together with business.

IT integrates solution partners to meet future requirements.

Efficient Operator

IT operations and solutions are provided with a maximum of availability and reliability.

IT infrastructure is established to manage cross-unit

synergies across the firm and to ensure a maximum of cost- effectiveness.

Table 6: Vision of IT

2.4.2 Mission of IT

IT as Innovation Enabler provides a platform that puts focus on agility, innovation, and speed to market. In order to enable an innovation ecosystem that pools internal knowledge and expertise, IT needs to invest in experimentation and applies, as well as shares best practices enterprise-wide. Therefore, the IT infrastructure needs to be adaptive and facilitate agile sourcing. IT as Solution Integrator provides a platform for integrating solution partners to ensure the timely delivery of solutions. In order to achieve business responsiveness, proximity to business, as well as to IT-decision- making needs to be assured. For the purpose of successful integration, attention should be directed on constructive negotiation and the facilitation of conflict resolution.

Taking the role as Efficient Operator, IT provides a platform that aims to maximize standardization, and drives scale through sourcing, consolidation, process improvement, as well as service quality across the organization.

The following table 7 summarizes each IT role’s mission as stated in the questionnaire.

Innovation Enabler IT provides an agile platform that allows rapid reconfiguration to create innovative IT-enabled business capabilities.

Solution Integrator

IT provides a platform that allows the integration of solution partners to enable the timely development and delivery of capabilities to support new offerings.

Efficient Operator IT provides a platform that allows leveraging cross-unit synergies across the firm for example through shared services.

Table 7: Mission of IT

2.4.3 IT Governance and Degree of Centralization

The IT governance determines the distribution of IT responsibilities and strategic decision-making rights within the organization and defines rules and mechanisms for monitoring decisions (Peterson 2004a). In other words, governance answers the

questions who makes IT decision and how, rather than which decisions are made (Weill 2004). Since an organization’s IT portfolio is directed by the governance, it is considered "the single most important determinant of IT value realization" (Peterson 2004b, p. 37).

In the survey, the inquiry of IT governance is segmented into two parts. The first set of statements examines the IT organization’s responsibility for technology and service innovation, whereas the second set of statements looks into the degree of geographical and managerial diffusion of decision making rights.

IT as Innovation Enabler is responsible for technology and service innovation delivery, and any projects initiated. Here, IT is to a large extent directly responsible for the firm’s competitiveness. The Solution Integrator role embodies shared responsibility between business and IT for technology and service innovation delivery and projects. Acting as Efficient Operator, IT is responsible for the availability of Information Systems and Services, but has no own responsibility for technology and service innovation delivery and projects.

The following table 8 summarizes each IT role’s responsibility for technology and service innovations as stated in the questionnaire.

Innovation Enabler

IT has responsibility for technology and service innovation delivery and any projects initiated and is therefore to a large extent responsible for the firm’s competitiveness.

Solution Integrator Business and IT have joint responsibility for technology and service innovation delivery and projects.

Efficient Operator

IT has no own responsibility for technology and service innovation delivery and projects, but for the availability of Information systems and services.

Table 8: IT Governance

The degree of IT governance centralization describes the managerial and geographical allocation of IT control and decision-making authority with regards to different IT functions (Peterson 2004a). While traditionally IT was seen as a single homogenous function, this notion is becoming increasingly obsolete due to the expansion and infusion of ICT in organizations (Peterson 2004b). Weill and Broadbent (1998) argue that modern organizations consist of a portfolio of interdependent functions and

capabilities and visualize the different IT functions in a simplified IT portfolio as adapted in figure 7. Moreover, IT governance has to address the dual demands of maintaining present business operations, while designing the IT function to meet future business demands (Peterson 2004a).

Figure 7: IT Portfolio, adapted from (Weill and Broadbent 1998; Peterson 2004b)

Following the proposition by Peterson (2004b); Weill and Broadbent (1998); and Peterson (2004a), the simplified IT Portfolio is divided into the functions Business Applications, Shared Services and Technology Components.

Business Applications are local, business-specific applications that are embedded in processes, products and services. Nevertheless, these applications utilize shared services and are built on shared platforms. Governance needs to decide upon prioritization and planning, budgeting, as well as delivery and maintenance of Business Applications. Shared Services are shared and standard IT applications such as enterprise resource planning (ERP) and shared IT services such as communication network services, which are based on knowledge of business processes and functions.

Technology Components are shared IT components such as hardware platforms, sensors and networks, that require standards for procurement and deployment of IT resources (Peterson 2004a; Peterson 2004b; Weill and Broadbent 1998).

To each of the three functions the dichotomy of centralization and decentralization can be applied. In general, centralization leads to greater standardization, specialization and economies of scale, while decentralization on the other hand enables a greater agility and responsiveness to specific business needs or “as noted in Teece et al.

(1997), more decentralized organizations with greater local autonomy are less likely to be blindsided by market and technological developments.” (Teece 2007, p. 1323).

According to Mintzberg (1979), centralization and decentralization should be treated as two ends of a continuum. In order to balance the benefits and disadvantages of both, a federal, hybrid governance model is proposed by several authors. Within the federal IT governance model, Technology Component decisions are centralized and Business Application decisions are decentralized (Peterson 2004a; Peterson 2004b;

Weill and Broadbent 1998). Advantages as well as disadvantages of the different IT governance models are summarized in table 9. Peterson (2004b) mentions well-known companies from different industries that have been actively experimenting with a federal IT governance model.

Centralized IT Governance

Decentralized IT Governance

Federal IT Governance

IT synergy + - +

IT standardization + - +

IT specialization + - +

Business responsiveness - + +

Business ownership - + +

Business flexibility - + +

Table 9: Advantages and disadvantages of IT Governance models (Brown, Magill 1998; Rockart et al.

1996)

Within the federal IT governance model, different patterns of differentiation exist (as shown in figure 8), ranging from IT-centric, balanced between business and IT, to business-centric. In an IT-centric federal model, the divisional IT Management (e.g.

Division Information Officer) is responsible for Business Application and Shared Service decisions, and the corporate IT executive is responsible for Technology Component decisions. While in a business-centric federal model, divisional business executives take the lead in Business Application and Shared Service decisions and corporate IT executives are still responsible for Technology Component decisions. A federal model which aims to balance Business and IT responsibility for Business Applications and Shared Services, necessitates increasing coordination between

divisional Business and IT decision makers, and as a result carries the risk to suffer from a loss of agility (Westermann et al. 2006).

Figure 8: IT Governance - Degree of centralization, adapted form (Peterson 2004a)

In the context of this study, the interest lies especially on the IT governance model for Business Application decisions, since Business Applications are seen as crucial for offering advanced PSS. The following survey statements were constructed to measure the IT governance model for IT portfolio decisions.

Table 10 summarizes the degree of IT governance centralization as stated in the questionnaire.

Innovation Enabler IT is decentralized. Several IT departments bring IT geographically closer to the user.

Solution Integrator IT is federalized. IT is diffused regarding geography and management

Efficient Operator IT is centralized. One central IT department provides services with a single-access provision.

Table 10: Degree of centralization

2.4.4 IT Controlling - Cost structure of IT

In particular within German literature, the task of managing costs and performance of IT is referred to as “IT controlling” (Hamel et al. 2010). Gadatsch (2009) gives an overview of IT controlling concepts and central tasks. The tasks reach from evaluating the value contribution of IT, supporting IT strategy and portfolio development, product

and project controlling, IT cost and performance accounting, to operational controlling (Gadatsch 2009). According to Strecker and Kargl (2009), the research field of IT controlling suffers from a lack of integration, which is expressed through missing synchronization between research on IT controlling methods and developments in practice on one hand, and missing synchronization between IT controlling methods and methods of business and information systems engineering (BISE) on the other hand.

In 2010, worldwide IT expenditures reached approximately 1.48 trillion US Dollar and IT budgets represented amounts between 3% and 15% of firm’s revenues, depending on the business sector (IDC 2010). This magnitude explains why IT management faces increasing pressure to track the value contribution of IT investments (Hamel et al.

2010). Plannability based on cost transparency and the accountable allocation to the business are crucial for successful IT Management. IT controlling should therefore support the interaction and coordination of interests between business and IT, through enabling high controllability of IT resources and demonstrating the business value which is added through IT activities. Zimmermann (2013) argue that the identification of core capabilities and competencies of IT is crucial for cost allocation and transparency. Nevertheless, it has to be mentioned that the evaluation of IT investments and resulting value contribution is challenging due to the usually intangible and complex characteristics of IT services.

Following Gadatsch, Mayer (2010), IT controlling can be divided into strategic IT controlling and operational IT controlling along an IT process model consisting of three parts (Figure 9). The IT process model includes selected IT management tasks and draws no clear line in the transition from strategic to operational IT controlling (Gadatsch 2009).

Figure 9: Areas of IT controlling along the IT process model (Gadatsch 2009; Gadatsch, Mayer 2010)

In the first process step, IT controlling works together with IT management and business departments to align IT and business strategy and to ensure that the IT portfolio is compatible with the IT strategy. Within the IT development process step, IT controlling supports the compliance of targets, results and budgeting of IT projects.

Efficiency analysis should be carried out for projects, and outsourcing of software development should be evaluated by IT controlling. In the third process step, IT controlling supports planning and operation of the IT landscape, which covers all information systems, services and hardware (Gadatsch 2009).

IS literature often states the interdependency and consequent conflict between IT development (build function) and IT operations (run function). The build and run functions are interdependent since the quality and architectural consistency during the development phase largely effect operating costs. Increasing operating costs on the other hand often reduce budget available for development projects. Studies conducted by the MIT Center for Information Systems Research (CISR) found that firms spend on average 66-68% of their IT budgets on IT operations (Ross et al. 2010).

Due to the increasing penetration of business processes with IT and the rising share of IT costs relative to the total costs of an enterprise, IT controlling is often falsely identified with IT cost management. A performance oriented IT controlling approach on the contrary is expected to facilitate the competitiveness of an enterprise by improving processes and efficiency of the use of IT (Gadatsch 2009).